By Leika Kihara
April 14 (Reuters) - The International Monetary Fund said on Tuesday it expected the Bank of Japan to raise interest rates gradually, but at a slightly faster pace than projected six months ago.
After Japan's economy expanded 1.2% in 2025, growth is projected to slow to 0.7% in 2026 and 0.6% in 2027, the IMF said in its World Economic Outlook report, roughly unchanged from its forecasts in October.
The effect of the government's fiscal stimulus package and steps to curb fuel bills will
offset headwinds from weaker overseas demand and the Middle East conflict, the report said.
Inflation is expected to moderate this year and converge toward the BOJ's 2% target by end-2027 as food and commodity prices ease, the IMF said.
"In Japan, the policy rate is projected to gradually rise, at a slightly steeper clip than thought in October 2025, toward a neutral setting of about 1.5%," the report added.
In October, the IMF said the BOJ was expected to raise rates gradually toward a neutral setting of around 1.5%.
After exiting a massive stimulus programme in 2024, the BOJ raised its short-term policy rate several times, including in December when it took it to a 30-year high of 0.75%.
Surging oil prices from the Middle East war have hit Japan's moderate economic recovery and complicated the BOJ's plan to raise still-low interest rates.
While the rising cost of fuel adds to already mounting inflationary pressures, it also hurts an economy heavily reliant on oil imports from the Middle East.
With consumer inflation hovering around its target for nearly four years, BOJ Governor Kazuo Ueda has signalled the bank's readiness to continue raising rates.
Markets are focusing on whether the BOJ could hike rates at its next policy meeting on April 27-28, though that prospect is fading as the protracted Iran war keeps markets volatile and muddles the economic outlook.
(Reporting by Leika Kihara; Editing by Jamie Freed)
